Suppose that France and Austria both produce fish and olives. France's opportunity cost of producing a crate of olives is 4 pounds of fish
17. Terms of trade
Suppose that France and Austria both produce fish and olives. France's opportunity cost of producing a crate of olives is 4 pounds of fish while
Austria's opportunity cost of producing a crate of olives is 11 pounds of fish.
By comparing the opportunity cost of producing olives in the two countries, you can tell that _______ has a comparative advantage in the production of olives and _______ has a comparative advantage in the production of fish.
Suppose that France and Austria consider trading olives and fish with each other. France can gain from specialization and trade as long as it receives
more than _______ of fish for each crate of olives it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _______ of olives for each pound of fish it exports to France.
Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of fish) would allow both Austria and France to gain from trade? Check all that apply.
1 pound of fish per crate of olives
3 pounds of fish per crate of olives
9 pounds of fish per crate of olives
7 pounds of fish per crate of olives
Homework Answers
By comparing the OC of producing olives you can tell that France has a comparative advantage in the production of Olives while Austria has a comparative advantage advantage in the production of Fish.
France can gain from trade as long as it receives more than 4 pounds of fish and similarly Austria can gain from trade as long as it receives more than 1/11 crate.
The following terms of trade would be result in gain for each country:
9 pounds of fish per crate of olives and
7 pounds of fish per crate of olives
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